The Michigan Department of Treasury issued a Notice announcing that it will no longer impose sales or use tax on certain prewritten computer software accessed electronically and associated online services. The Notice comes on the heels of the Michigan Court of Appeals decision in Auto-Owners Insurance Company v. Department of Treasury and the Michigan Supreme Court’s refusal to review Thomson Reuters Inc. v. Department of Treasury. The Department is departing from its long-standing policy on the taxation of electronically accessed prewritten software and associated online services, which paves the way for taxpayer refund claims.

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By Samantha Trencs and Amy Nogid

The California Board of Equalization (BOE) voted to adopt an amendment to Ca. Code Regs. tit. 18, § 1525.4, to resolve a statutory ambiguity by clarifying that a taxpayer will qualify for the partial sales and use tax exemption available for certain manufacturing and research and development equipment purchases and leases if the purchase has a useful life of one or more years, even if the taxpayer expensed the purchase. The amendment was prompted by a rulemaking petition submitted by the California Taxpayers Association that raised concerns that taxpayers could receive disparate treatment under the exemption depending on whether they capitalized or expensed their acquisitions on their state income/franchise tax returns.

The changes expressly allow taxpayers to substantiate their qualification under the “useful life” criteria by reference to either a warranty, a service contract, or an industry replacement standard of one year or more.

The BOE adopted the amendments despite the Department of Finance’s position that the amendments exceeded the scope of the BOE’s statutory authority and that the BOE failed to consider the economic impact of the amendments. However, the BOE maintained that the amendments were necessary to ensure that the partial exemption from sales tax legislation, California Revenue and Taxation Code § 6377.1, which became effective on July 1, 2014, was utilized “as originally anticipated and intended by the Legislature.”[1] Accordingly, the BOE made the amendments retroactive to the effective date of the statute. Under California’s rulemaking process, the BOE’s adoption was forwarded to the Office of Administrative Law (OAH) to confirm compliance with the Administrative Procedure Act for approval by February 17, 2016. State Board of Equalization’s Adoption of Proposed Amendment to California Code of Regulations, Title 18, Section 1525.4, Manufacturing and Research and Development Equipment (Cal. State Bd. of Equalization).

 

[1] Updated Informative Digest for the State Board of Equalization’s Adoption of Proposed Amendment to California Code of Regulations, Title 18. Section 1525.4, Manufacturing and Research and Development Equipment (Cal. State Bd. of Equalization).

SACRAMENTO—Sutherland Asbill & Brennan LLP is pleased to announce that Eric J. Coffill has joined the firm’s 37-attorney State and Local Tax (SALT) practice. Prior to joining Sutherland’s Sacramento office, Mr. Coffill was the managing partner of Morrison & Foerster LLP’s Sacramento office.

Widely respected nationwide for his state tax counsel, Mr. Coffill has more than 30 years of experience advising clients on multistate tax controversy and litigation matters at the administrative, trial and appellate levels. Mr. Coffill has particularly significant experience representing clients before the California Franchise Tax Board (FTB) and the State Board of Equalization (SBE).

“Expanding our California practice has been critical to the unprecedented growth of our nationally recognized SALT practice,” said Sutherland Managing Partner Mark D. Wasserman. “We are excited to have a leader in California state taxation join our firm, and we are excited about our prospects for continued growth.”

A former staff counsel to the FTB and a public defender for the Office of the California State Public Defender, Mr. Coffill has extensive litigation experience, particularly with regard to California tax matters. He is rejoining Sutherland Partner Carley A. Roberts, leader of the firm’s Sacramento office. The pair litigated the landmark case defining corporate business income. [Hoechst Celanese Corporation v. Franchise Tax Board (2001) 25 Cal.4th 508] 

“Eric is widely regarded as a thought leader in state taxation,” said Ms. Roberts. “I am thrilled to be working with him again. Eric is an outstanding lawyer and his three decades of experience in state taxation makes him a tremendous resource for our clients and practice.”

Since opening the Sacramento office in February 2012, the Sacramento team has doubled in size and has represented numerous clients in California tax cases that have established precedents and provided guidance for the evolution of tax law in other states. Sutherland’s groundbreaking wins in California tax litigations include Comcon Production Services v. Franchise Tax Board, which challenged the application of California’s unitary tax law; Microsoft v. Franchise Tax Board, where Sutherland won an appellate decision establishing that the right to copy software is intangible property for sales factor apportionment purposes; and Verizon California Inc. v. Board of Equalization, which eliminated the procedural hurdles for challenging statewide property tax assessments.

Sutherland’s SALT practice has seen significant growth during the past year. The practice welcomed nine new associates since February: Hanish S. Patel in Atlanta; Charles C. Capouet, Elizabeth S. Cha, Chris M. Mehrmann and Samantha K. Trencs in Washington DC; Michael J. Kerman and Michael P. Penza in New York; Nicholas J. Kump in Sacramento; and Olga Jane Goldberg in Houston.

Sutherland has been a leading adviser on state and local tax issues for more than 60 years and maintains one of the largest SALT practices in the country. Sutherland SALT serves as national state tax counsel to some of the world’s largest companies, including nearly 30 of the Fortune 100 and numerous other industry-leading businesses, advising clients on state and local tax consulting, planning, compliance, litigation and policy matters. The team works with clients on the full spectrum of issues and tax types, including income, property, sales and use, and telecommunications taxes.

By Stephen Burroughs and Jonathan Feldman

The Indiana Tax Court granted summary judgment to Columbia Sportswear USA Corp., (“Columbia”), determining that: (1) Indiana’s alternative apportionment statute did not permit the Department to equitably adjust Columbia’s tax base; and (2) Indiana’s standard sourcing rules clearly reflected Columbia’s Indiana source income because transfer pricing studies supported Columbia’s intercompany transactions as being consistent with Indiana’s conformity to I.R.C. § 482.

Columbia purchased its apparel and accessories from related entities that it distributed in Indiana and other states. An accounting firm prepared a series of transfer pricing studies to determine arm’s length prices for the intercompany purchases. Citing to its authority under the state’s alternative apportionment and I.R.C. § 482-type statutes, the Department assessed Columbia by applying the consolidated group’s profit margin to each separate legal entity. The Department asserted that the transfer pricing studies were irrelevant in determining whether the statutory sourcing rules clearly reflect Columbia’s Indiana income because: (1) Indiana has not adopted nor enacted a statute similar to I.R.C. § 482 or its regulations; (2) I.R.C. § 482’s purpose is not to ensure a clear reflection of Indiana net income; and (3) the transfer pricing studies contained a disclaimer that prevented their application to state tax issues.

The Court rejected all of the Department’s arguments. The Court disposed of the Department’s first two arguments by citing to its recent decision in Rent-A-Center (noting the strong similarity between I.R.C. § 482 and Indiana’s statutory equivalent and that I.R.C. § 482’s purpose of ensuring the clear reflection of income between related organizations is relevant to the same determination under Indiana law) (prior coverage here). The Court concluded that the purpose of the disclaimer was only to limit the accounting firm’s professional responsibility regarding the transactions’ compliance with I.R.C. § 482 and does not render the studies irrelevant to a distortion analysis. The Court also determined that even if Columbia’s Indiana net income was distorted, the Department’s adjustment method was unreasonable. Finally, the Court rejected the Department’s request to remand the case to allow it to use forced combination as an alternative apportionment method because the Department had already concluded on audit that combination was inapplicable. Columbia Sportswear USA Corp., v. Indiana Dep’t of Revenue, No. 49T10-1104-TA-00032 (Ind. Tax Ct. Dec. 18, 2015).

On December 31, 2015, the California Supreme Court closed the book on California’s Multistate Tax Compact election saga, unanimously holding that the Compact is not a binding contract among its members and the State was not bound by its provisions before the State’s repeal of the Compact in 2012. 

Citing the Multistate Tax Commission’s amicus curiae brief as much as the Franchise Tax Board’s brief and largely ignoring the Court of Appeal’s lengthy decision, the Supreme Court concluded that the Compact does not satisfy any of the indicia of binding interstate compacts contemplated by the United States Supreme Court in Northeast Bancorp v. Board of Governors, FRS (1985) 472 U.S. 159.

View the full Legal Alert

Read our December 2015 posts on stateandlocaltax.com or read each article by clicking on the title. For the latest coverage and commentary on state and local tax developments delivered directly to your phone, download the latest version of the  Sutherland SALT Shaker mobile app.
 

  • SALT Pet of the Month: Asa
    Meet Asa, frequently known as “Doodle,” an Australian Shepherd belonging to Sarah Wellings, Director – State and Local Tax at Comcast.

  
 

 
 

 
 

 
 

 
 

 
   

Asa 2.jpg

Meet Asa, frequently known as “Doodle,” an Australian Shepherd belonging to Sarah Wellings, Director – State and Local Tax at Comcast. 
Adopted in the Finger Lake region of New York, this sweet boy celebrated his tenth birthday in August and has been with Sarah since he was just a pup.

Asa is an indoor dog who loves the great outdoors. His favorite activities include swimming, playing Frisbee and hiking. He can be seen enjoying a hike in the Adirondack Mountains last summer in the picture below. Because he is a herding dog, his pack instinct is very strong, and he always wants to be with his people. When he’s put outside, he stays as close to them as he can by lying up against the door until he’s let back in.

This silly guy is incredibly sweet-tempered and loves all people, especially kids. His only dislike is the recorder used by Sarah’s son, Noah. Whenever Noah plays it, Asa runs up to him and licks at his mouth to make him stop.

Asa is very pleased to be December’s Pet of the Month! 

By Evan Hamme and Timothy Gustafson

The California State Board of Equalization (Board) unanimously rejected Craigslist, Inc.’s (Craigslist) argument that California’s adoption of a factor-presence nexus regime in 2009 reflected pre-existing federal constitutional nexus standards pursuant to which Craigslist would be “subject to tax” in jurisdictions where it did not have a physical presence, and would not be required to throw out sales made in such jurisdictions. Pursuant to a written agreement, the California Franchise Tax Board (FTB) had granted Craigslist alternative apportionment for the 2007-2010 tax years, which required Craigslist to exclude from its sales factor sales made in states where Craigslist was not subject to tax under “United States constitutional standards for nexus.” At the time, California law, as interpreted by the Board and the FTB, required taxpayers to have a physical presence in a jurisdiction to be taxable in that jurisdiction. But 2009 legislation changed California’s nexus rules to include a market-based definition, effective January 1, 2011, which established a bright-line, $500,000 threshold for sales in a state to establish nexus. Craigslist filed an amended return in 2011 for the 2007 tax year, and included in its sales factor sales in any jurisdiction where Craigslist had more than $500,000 in sales for 2007 even if Craigslist had never had a physical presence there, arguing that if economic nexus satisfied U.S. constitutional standards in 2009 when expressly adopted by the California Legislature, it necessarily satisfied those same standards two years prior. The FTB argued that the constitutional standards must be determined through the lens of California decisional law, that the 2011 legislation applied prospectively to adapt to changes in the economy, and that a Board ruling in favor of Craigslist would cause significant uncertainty for other taxpayers regarding pre-2011 tax and filing obligations. The Board unanimously agreed with the FTB and denied Craigslist’s appeal, stating at the hearing it would be an “injustice” to allow the “change in law” effective in 2011 to apply to earlier years. Because the amount in controversy exceeds $500,000, the Board will have 120 days from when the appeal becomes final to issue a written decision. Appeal of Craigslist, Inc., Cal. Bd. of Equalization, No. 725838, appeal denied, Dec. 16, 2015.

There’s never a dull moment in Delaware when it comes to unclaimed property. The latest salvo comes by way of a lawsuit filed by the Delaware Department of Finance against Blackhawk Engagement Solutions (DE), Inc. (formerly known as Parago, Inc.), a provider of rebate, reward and incentive programs to retailers and other client companies. As part of an unclaimed property audit being conducted by Kelmar Associates, the Department is seeking to enforce a summons and obtain access to client contracts, uncashed rebate check amounts returned to clients, and the particulars of the rebate checks and payees. The complaint alleges that more than 300 retailers use Parago for rebate fulfillment assistance. 

View the full Legal Alert.

By Samantha Trencs and Andrew Appleby

A South Carolina administrative law judge (ALJ) determined that cell phone insurance is not subject to South Carolina sales tax even though the wireless provider sells it with taxable communication services.

Alltel provided its wireless customers with an option to purchase insurance for the loss, theft or damage to their cell phones (cell phones have a way of accidently finding their way into toilets). Alltel remitted the monthly premiums its customers paid for insurance coverage to Alltel’s insurance agent, who then remitted the premiums to an insurance company.

The ALJ concluded that this cell phone insurance arrangement constituted insurance under South Carolina law, which is not subject to sales tax. Even though Alltel offered the insurance with its taxable communication service, the ALJ reasoned that the insurance was not inextricably intertwined with the communication service because the insurance was optional. Additionally, Alltel did not provide the insurance. Rather, a licensed insurance agent and insurance company provided the coverage. Therefore, the insurance charges were not subject to South Carolina sales tax. Alltel Commc’ns, Inc. v. South Carolina Dep’t of Rev., Dkt. No. 11-ALJ-17-0603-CC (S.C. Admin. Law Ct. Nov. 13, 2015).